High-yield dividend investing is making a comeback. At least, that’s my prediction for 2023.
Although share prices have rallied since October, I can still see 12 FTSE 100 stocks with dividend yields of 7% or more. If I include smaller companies too, that number rises further.
Of course, it’s always important to make sure that dividends are covered by earnings and cash flow. Otherwise, a cut may be needed.
For this piece, I’ve chosen three stocks with yields of 7% that I think look safe choices for 2023.
An 8% yield
Profits have soared at mining and trading group Glencore (LSE: GLEN) this year. This is mainly thanks to the surging price of thermal coal, which is used in power stations.
Glencore’s coal profits rose to nearly $9,000m during the first half of 2022, up tenfold from around $900m one year earlier. This windfall is providing Glencore with cash to invest in dividends, share buybacks, and greener commodities, such as copper and zinc.
Of course, there’s no guarantee that coal prices will stay high next year. If demand eases due to a widespread recession, profits could fall faster than expected. Management must also hope that prices for copper, nickel, and other materials needed for electric power stay strong.
This situation isn’t without some risk. But in my view, the forecast dividend yield of 8% looks safe enough for the next year or two. I think Glencore shares offer decent value at current levels.
Boring but reliable
My second pick is insurance group Phoenix (LSE: PHNX). This FTSE 100 firm has flown below the radar for many UK investors, despite having an excellent record as a high-yield stock.
Phoenix’s core business is buying life insurance policies from other insurers and running them to completion. This activity generates a lot of cash, but growth opportunities are limited.
To address this, management are now placing more emphasis on new product sales in areas such as life insurance and retirement savings. These are taking place under the Standard Life brand, which Phoenix owns.
My main concern is that these new business sales won’t be as profitable as the group’s core closed-book business. However, results so far seem positive, so I’m comfortable with the situation.
Phoenix shares currently have a forecast yield of 8.5% for 2023. This payout is expected to be covered 1.5 times by earnings, which suggests it should remain affordable. I see the shares as a good choice for income.
A 7% sin stock
Like it or not, tobacco stocks are some of the most reliable dividend payers on the UK market. British American Tobacco (LSE: BATS) has an unbroken record of dividend growth stretching back more than 20 years.
In that time, the payout has risen from 33p per share in 2002, to 217p per share. Despite this strong record, BATS’ share price slump since 2018 means that the stock now offers a 2023 forecast yield of 7.6%.
The risks facing this business are well known. The product is dangerous, regulation is tough, and the rate of smoking is falling, at least in developed markets.
However, BATS owns some of the world’s top cigarette brands and remains highly profitable. As an income investment, I think it’s a fairly safe choice.
